Philip Stein & Associates — U.S.-Israel Tax Treaty: Pensions and Retirement Accounts (IRA, 401k)

Source: https://www.pstein.com/our-firm/us-israel-tax-treaty · 2026

U.S. Pensions for New Olim — 10-Year Exemption in Israel

Israel provides a significant benefit for new immigrants (olim) outside of the treaty itself:

• For the first 10 years after making Aliyah, U.S. pension income (including IRA and 401k distributions) is fully tax-exempt in Israel.
• After the 10-year period, Israel taxes olim on foreign pension income under Section 9(gimel) of the Israeli Tax Code — but only up to the rate that would apply in the country of origin. If the U.S. rate is 20%, Israel will not tax it at more than 20%.

Planning Example: A married couple who made Aliyah 10 years ago and withdraws $24,000 or less per year from U.S. pensions may do so completely tax-free in Israel, if they have sufficient income from other sources to stay within tax-free thresholds.

U.S.-Israel Treaty — Article 20 (Pensions)

Article 20 of the treaty states:

“Except as provided in Article 22 (Governmental functions), pensions and other similar remuneration paid to an individual shall be taxable only in the Contracting State of which he is a resident.”

Important limitation: Article 6 (the “savings clause”) overrides Article 20 for dual U.S.-Israeli citizens. This means dual citizens cannot fully rely on Article 20 to avoid U.S. tax on pension income.

Israeli Citizens Only (Not Dual Citizens) with U.S. Pensions

For individuals who are Israeli citizens only (not U.S. citizens) but have a U.S. IRA or pension from previous work in the U.S.:

• With proper planning, it may be possible to withdraw U.S. pension funds tax-free in the U.S.
• This creates significant planning opportunities, particularly for those within the right age range who have recently returned to Israel after working in the U.S.

Israeli Pensions for U.S. Citizens — Complex and Often Unfavorable

Israeli pension accounts are a major area of dispute for U.S. citizens:

• Some accountants hold that accrued Israeli pension income is taxable in the U.S. as it accrues.
• Others hold that Israeli pensions grow tax-free in the U.S. but create a taxable event upon withdrawal — which is often exempt in Israel.
• In either case, being a U.S. citizen significantly reduces the tax benefits that Israeli law would otherwise provide.

Recommendation: Anyone making Aliyah with a U.S. IRA, 401k, or other deferred retirement account should consult with a qualified tax professional familiar with both U.S. and Israeli tax law before making withdrawals or other pension decisions.